Saving, investing and everything in between you need to know
July is national savings month - the month during which financial services companies will bombard you with information about how bad we are at saving.
South Africans are, in fact, good savers - the National Stokvel Association of South Africa estimates that there are over 800 000 stokvels with a combined membership of 11.2 million. These are people who know how to save, but many are not investing. We also have investors who don't save, and spend money they could be investing.
Here are some home truths.
Everyone who earns can save
If you spend less than you earn, it is possible to save. A recent New York Times article centred on a frugal legal secretary who worked at the same firm for 67 years until she retired at the age of 96 - she was a "closet millionaire" who had amassed a fortune of more than $9-million (about R125-million).
Reports claim that Sylvia Bloom joins a host of others who did not live above their means: Ronald Read, a former petrol station attendant and janitor who died in June 2014 with a fortune of $8-million; Grace Groner, a secretary with an estate of $7-million; and Ronald Murin, a librarian who had an estate worth $4-million.
"Every little bit helps. Putting some money away every month and forgetting about it is key to creating long-term wealth," says Beki Mafulela, a certified financial analyst at Allan Gray.
The difference between saving and investing
When you put money aside for future use, you're saving. Your objective is to preserve money for a specific goal. But when you invest, your objective is to earn a return. Most people need to save and invest.
You may save for a car or a holiday - so that you don't have to use credit - or you may save to invest. For example, you may want to invest your savings for a child's tertiary education. You invest over your working life for your retirement in assets that appreciate in value over time.
Don't invest too conservatively
Sometimes people who are good at saving are no good at investing. A person who is disciplined enough to save diligently may leave their money in the bank or a money market fund, where it fails to keep pace with inflation. If you are saving for the long term, you should invest at an inflation-beating return.
Old Mutual's 2018 Long Term Perspectives booklet says that over the long term the average real (after-inflation) returns from cash investments in South Africa have been around 0.9% a year with 23 years in which returns were below inflation. At this average return it will take 90 years to double your money. But when investing in equities, where average real returns have been 7.5% since 1929, you could double your money in 10 years.
Depending on your time horizon and appetite for risk, you may not want the volatility of equity returns.
Lower-risk multi-asset funds which are diversified across the asset classes can grow your savings at between 3% and 7% after inflation, depending on the investment risk you can afford to take.
High returns = high risk
Beware of very high returns whose source cannot be explained, as it is likely to indicate a Ponzi scheme or a scam. In investments like unit trust funds or listed shares, if you're after high returns, you must be willing to take a high degree of risk. And before you do that, make sure you understand the underlying investment thesis.
Mark MacSymon, a wealth manager at Private Client Holdings, says you shouldn't seek high returns with money you aren't comfortable investing over seven years or longer.
A financial plan is one of the best ways to avoid a scam. Investors who are chasing high returns often do so out of desperation, when they find themselves close to retirement with insufficient investments. This renders them vulnerable to scams.
MacSymon says a financial adviser can be your sounding board and save you from costly mistakes. Your adviser can also guide you on what risks you need to take and your capacity for investment loss, so you make better investment decisions, he says.
You don't have to know it all to invest wisely
You may hear people boasting about fantastic returns they have earned apparently from selecting top shares or fund managers or choosing the right time to invest. But you don't have to know it all or how to time the market to invest successfully - you just need an investment that delivers good, consistent, inflation-beating returns.
Investment companies frequently publish research showing that people who chase top-performing funds earn worse returns over time than investors who stick with the same relatively good performer over time.
Costs matter, but investing matters more
Finding investments that can deliver good returns at a low cost is important, but don't get trapped in the debate about the merits of higher-cost actively managed investments versus lower-cost passively managed ones.
Roland Gräbe, head of tailored fund portfolios at Old Mutual Wealth, says the debate is mainly driven by asset managers who have a vested interest in promoting one above the other.
Gräbe is promoting the third option, a blend of active and passive designed to give you the best of both.
If you are not following the debate at least make sure your investment is delivering a reasonable return after costs and invest rather than search for the perfect investment.